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The Essential Step-by-Step Guide to Understanding Outsourcing and Establishing a Successful Partnership for Success
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Copyright 2012 - Segue Manufacturing Services
The Essential Step-by-Step Guide to Understanding Outsourcing
and Establishing a Partnership for Success
An eBook from Segue Manufacturing Services
The Essential Step-by-Step Guide to Understanding Outsourcing and Establishing a Partnership for Success
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Copyright 2012 - Segue Manufacturing Services
Table of Contents
Introduction 2
WhyOutsource? 3
KeyPrincipalsDefined 4
ExtendedFactoryStrategy 5
ManufacturingPartner 7
HighlevelAssemblyStrategy 9
BreakevenAnalysis 12
AdvancedManufacturingPractices 13
IdealSituationsforOutsourcing 16
SelectingaPartnerthatCanProvideaCompetitiveAdvantage 18
GlobalSourcingandSupplyBaseConsolidation 24
CreatingtheWIN/WIN 30
PuttingitAllTogether:IntegratingwiththeProductLifeCycle 34
EnsuringaPredictableProcessforSuccess 40
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Introduction
Ifyou’rereadingthiseBook,chancesareyou’reeitherconsideringoutsourcingorlookingtorefineyourpartnershipswithyourcurrentvendorsinordertotakeadvantageofthebenefitsofoutsourcingandcontractmanufacturing.Fromselectingtherightpartnertoovercominglongleadtimesandeffectivelocalizationofkeycomponents,thiscomprehensiveeBookwillbeyourguidetoachievingsuccesswithyourcontractmanufacturer.
Thisguidewilltakeyouthroughtheessentialstepsneededtoformasuccessfulpartnershipwithyourcontractmanufacturerwhetheryou’reinthemedicalequipment,semiconductor,aerospace,orthealternativeenergyindustry,tonameafew.
Ifyou’renewtothecomplexitiesofoutsourcingorlookingtoenhanceyourvendorpartnerships,takethefirststepandreadthiseBook,youwillbeonyourwaytorealizingthebenefitsofoutsourcingeitherintheUnitedStatesorinalow-costregionoftheworld!
From selecting the right
partner to overcoming long
lead times and effective
localization of key components,
this comprehensive contract
manufacturing eBook will be
your guide to achieving success.
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Why Outsource?
You’vereadandheardoverandoveragainthatoutsourcingyourmanufacturingandmovingyourproductionoffshorecanhelpyoureducecostsandservelocalmarketsmorecompetitively.Companieshavebeenoutsourcingforyearstorealizethesebenefits.Inasuccessfulrelationship,therearemanymorebenefitsbeyondlowercosts.Selectingtherightcontractmanufacturercanhelpimprove focus, keep fixed costs low, reduce working capital requirements, increase return on investmentinresearchanddevelopment,andhelpgainaccesstocapabilitiesoutsideyourcorecompetencies.
Improve focus, keep fixed costs
low, reduce working capital
requirements, increase return
on investment, and gain access
to new capabilities
Soundsperfect?Justremember,outsourcingisonlyasgoodastheexpertiseandrelationshipsonwhichitisbasedandhavingtheenergyandresourcestomanageit.Inorderforcompaniestoobtainthebestpossibleoutcomesfromoutsourcing,theymustformmutuallybeneficialrelationshipswiththeiroutsourcingpartnersandletthesepartnersdowhattheydobest.
Outsourcingshouldbeastrategicdecision.Itshouldbethecornerstoneofanoveralloperationsstrategythatisdesignedtosupportthestrategicdirectionofthecompany.Itshouldincludeconsiderationsofhowyoumanageyouroverallcompanycostsandhowtoemployaneffectiveextendedfactorystrategy.
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Key Principles Defined
Surveydatashowsthatthenumberoneitemthatcompaniesoutsourceisprintedcircuitboardmanufacturing,followedverycloselybymachiningandcable&harnessassembly.Thesedecisionsaremadeformanyreasonsbutincludethecapitalequipmentinvestment,thevolumetricleveragegainedbyoutsourcingthepurchasingandmanagingofthousandsofcomponents,andtheknowledgenecessarytogetconsistentrepeatablehighqualitymanufacturing.
Intoday’sglobalmarketsandeconomicclimatethesamereasoningthatappliedtothePCBdecisioncanalsobeappliedtokeysub-assembliesbyemployingoperatingstrategiesthatsupporttheuseofanextendedfactoryorHighLevelAssemblystrategy.
60%
50%
40%
30%
20%
10%
0%
PCB
Cable & H
arnessM
achiningBox BuildM
ech Assembly
High Level Assem
blyFinal Assem
bly & Test
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The Extended Factory Strategy
Companiesthatrelyonacoretechnologyasthecornerstonefortheircompetitiveadvantageneedtofocustheirtechnicalexpertiseandoperationsonthatcoretechnology.Outsourcingorutilizinganextendedfactorystrategytomanagelesscriticalsub-assemblieswillhelpimprovefixedcostsandreduceoverheadinthematerialsorganization,aswellasreduceinventoryandfloorspacerequirements.
Itisnecessarytounderstandalltheelementsthatdrivecostinordertocalculatethetruebenefitsofoutsourcing.Manypeopleinthepurchasingenvironmentaremeasuredonpurchasedpricevariance(PPV).Thisdoesn’tnecessarilyguaranteeyouthelowestcostandmanytimesdrivesthewrongbehavior.
When calculating total cost of procurement the following should be considered:
n Purchasing
n Shipping and receiving
n Inspection, if required
n Materials Management
n De-packaging
n Stocking
n Integration of completed assemblies vs. components
n Variations caused by poor quality and late delivery
Let’s take a deeper dive into these topics.
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Maximizing Value, Mitigating Risk
Let’s examine the different levels of involvement a customer can have with their contract manufacturer and the value and risk at each level.
Supplier
AcontractmanufacturercanbeasupplierofcomponentssuchasPCBassembly,cableandharness,plasticmoldingormachining.Asupplierisselectedbasedonitsperceivedabilitytodeliverqualitypartsatafairprice,on-time.Thistypeofrelationshipisgenerallyanarm’slengthandprice-drivenprocesswheremultiplevendorsquotethepartsanddeliveryismadeperthecustomer’sMRP.Customersplacediscreteordersonthesupplierswhofulfillthoseordersasspecifiedinthepurchaseorder.Thistypeofprocessisthemostcommonbutingeneraldoesnotyieldthelowestcost.
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Manufacturing Partner
Acontractmanufacturercanalsobeamanufacturingpartner.Inthiscasethecustomerentersintoalong-termcontractwiththesupplierandplandeliveriesforthosecomponentsbasedonscheduledreleasesorKanbandeliveries.Thistypeofrelationshipgenerallywillprovidealowerlandedcostthanabasiccustomer/supplierrelationship.
Asanexample,apurchasingdepartmentnegotiates,inadditiontoprice,anannualcontractandtheassociateddetailsaroundreleaselogisticsandfulfillment.Whenimplementedcorrectly,resultscanyield:
n Thelowestpriceonpurchasedpartsbasedonannualcontractvolumes,
nImprovedpricebasedonanalysisofEconomicOrderQuantities(EOQ)versusStandardOrderQuantities(SOQ),
nReductioninmaterialsmanagementoverheadasshipmentsfromthemanufacturingpartnercanbemadedirectlytotheshopfloorasrequiredbyproduction.
Insomecases,piecepartpricemightbeslightlyhigherbuttotallandedcostisalwaysmuchlower.TherealproblemhereisthatmanypurchasingdepartmentsaremeasuredsolelyonPurchasePriceVariance(PPV),therebyignoringsignificantincrementalsavingsinlandedcost.Thisneedstogothewayofthehorseandbuggy!
StandardOrderQuantitiesarebasedonacustomer’smonthlyorweeklyrequirements.However,thisdoesnotnecessarilycoincidewiththeeconomicorderquantityofthecomponents.Anannualcontractcanprovideyourcontractmanufacturecontrolofcomponentquantitiesthatcanoftenreducetotalcostofmanufacturing.
Economic Order Quantity
(EOQ) The level of inventory that minimizes total
inventory holding costs and ordering costs.
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Turnkey Partner
Acontractmanufacturercanalsobecomeanintegralpartofacompany’soperatingstrategybydeliveringturnkeymanufacturingsolutions.Generallythecontractmanufacturerentersalong-termagreementtosupplymorevalue--complete,fullytestedandqualifiedproductsandsub-assembliesthatmaytakeadvantageofitsglobalsourcingcapabilityandsupplychainmanagement.Controlisshiftedovertothecontractmanufacturertoleveragetheirend-to-endcapabilities,includingmaterialsmanagementefficienciesandcosteffectivesourcing,andengineeringsupporttoprovidefinishedproductdirectlytotheenduser’sdock.Leveragingyourcontractmanufacturerasanextendedfactorymaximizesthevalueofoutsourcing,mitigatesriskandincreasesyourabilitytocontrolandreducethebreakevenpoint.
ThisisalsoknownasaHigh Level Assembly Strategy.
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High-Level Assembly Strategy
High-LevelAssembly(HLA)isaprovenoperationsstrategythatallowsOEMstofocusitsin-houseeffortsonthetop-levelassemblytosimplifyproduction,minimizeinventory,floorspace,manufacturingoverheadanddirectlabor.
The financial benefits from employing such an operating strategy can include the following:
n Convert fixed costs to truly variable • directlabor,manufacturingsupervisionandsupport
• procurementandmaterialsmanagement
• incomingandin-processquality
• manufacturingengineeringandproductdesignsupport
n Lower cost by leveraging a supplier’s • leanlowcoststructure
• globalsupplychainandcommodityleverage
• abilitytoleveragefixedcostsacrosshighervolume
n Reduced working capital needs and improved cash flow • supplierownsandmanagesrawandin-processinventory
• cashtosupportoperatingcosts
n Reduced space requirements • officespaceforproductionsupport
• stockroom
• productionfloorspace
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In addition, effective implementation of an HLA strategy yield the following operating benefits:
n Reduced time to market • focusoncorecompetencies
• concurrentengineeringwithkeysuppliers
• acceleratedprototypingandproductionrampingbyleveragingsuppliercapabilities
n Reduced manufacturing cycle times(Especially when combined with DFT/Kanban)
• managementoffewerparts
• improvedrampcapability
• high-levelassemblyatfactoryorcustomersite
n Simplified trouble shooting and field service • troubleshootatthemodulelevel
• advancedexchangepossible
n Reduced space requirement • officespaceforproductionsupport
• stockroom
• productionfloorspace
HLA Strategy In-House Manufacturing
Vendors 4 -10 100s - 1,000sParts 4 -10 1,000s – 10,000s
Inventory Turns 12+ 4-8
Materials Management Personnel 1-2
Multiple Buyers, Planners & Stockroom
Personnel Manufacturing
Supervision 1-2 6-12
Working Capital 60% - 80% Reduction Significant Investment
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Case Study: Manufacturing of a complex control cabinet assembly as part of a HLA strategy.
Before:
n Customermanagedmultiplevendors
n Discreteorderplacementdrovehighmaterialliabilityinacyclicalmarket
n Customersourcingandengineeringofallcomponents
n CustomerECOcycletimewasverylong
After: Turnkey Mfg Solution
n Customermanagedasinglesupplier
n ECOcycletimereducedduetosuppliercapability
n CompleteJIT/DFTSolutionusingVendorManagedinventoryreducedliabilitybyafactorof5
n SuppliercapabilityprovidedVerticalIntegrationandtheabilitytolocalizeproductionforakeymarket.InadditionthesecapabilitiesenabledlowercostandasignificantreductioninECOimplementationleadtimes.
n Complexcablesandharnesses
n Machinedpanels
n Globalsourcingandlocalization(cabinetsinChinaforChinamarketandcabinetsintheUSfortheUSMarket)
Customer Benefits:
n 15%CostReductioninfirstyear
n 20%costreductionthesecondyear
n 60%ReductioninECOimplementationcycletime
n 80%ReductionininventoryandPurchaseordercommitments
n Ascalableproductionenvironment–5to20systemsperweek
n Spacereductionof5,000–10,000sq.ft.
n ReductionsinMaterialsandManufacturingOverhead
Requirements of HLA Suppliers
HoweverrealizingallofthesebenefitsrequirescommitmentandsupportfromthetopondownfromboththeconsumerandtheHLAsupplier.Theteamneedstobecommittedtooverallcustomersatisfaction,costreductionandadedicationtooperationalexcellenceandrelentlesscontinuousimprovement.
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Breakeven AnalysisUnderstandingyourbusinessbreakevenpointandthecostofrunningyourbusinessiskeytodeterminingyouroutsourcingstrategy.Thecostofrunningyourbusinesscanbecalculatedbasedonthesevenkeycategoriesbelowtohelpyoucreateasimplebreakevengraph.Thisbreakevenisanestimateandisgenerallybasedonanaverageproductmixandisasinglepointintime.
1. Salaries,benefitsandotheremployeerelatedexpenses,includingdirectlabor
2. Facilitiescost
3. Materialcostcalculatedasapercentofshipments
4. Depreciation/Amortization
5. Consultingandotheroutsidecosts
6. T&EExpense
7. Other
Quarterly Breakeven EBITDA
Understanding the benefits of a business’
breakeven point is key to determining
an appropriate outsourcing strategy.
Read more on the benefits on page 37.
$5.0M
$4.5M
$4.0M
$3.5M
$2.0M
$2.5M
$2.0M
$1.5M
$1.0M
$500K
$0
$500,000$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000$4,000,000$4,500,000$5,000,000
Salaries
T&E Expense
Material
Facilities Costs
Consulting
Depreciation/Amortization
Other
Breakeven
$3,127,798
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Advanced Manufacturing PracticesAcontractmanufacturerthatutilizesleanprinciples,demandflowtechnology(DFT)andhastheabilitytolocalizecomponentsfromalowcostregion,cansignificantlyreducetotallandedcosts.MuchofthiscanbeaddressedwithDFTorJust-in-Time(JIT)strategies.WithoutanHLAstrategy,customersgenerallyplacepurchasedordersontheircontractmanufacturerforaspecificquantityofunitstobedeliveredwithinaspecifictimeframe.Typicalorderscanrangefrom3-6monthstoevenayear.Thisisaccomplishedwithchangeordersthataskthesuppliertopushoutorpullindeliveriesbasedonthecurrentsituation.Oftenonareschedule,suppliersdonotcancelmaterialonorderwiththeirsuppliersbutinstead,eitherletitcomeinorrescheduleit-thusincreasingthecustomer’sultimateliability.Whentryingtopullinorders,deliverydatesofkeycomponentsoftencan’tbechangedthusleavingtheendcustomerwithoutproduct.
In a DFT environment, the approach is very different. The four requirements for a successful DFT environment include:
1.Placeablanketorder
2.Establishfixedwindowsforreschedulesandcancellations
3.Establishamonthlyforecastwhichincludesrequirementsforandlevelsofincreasedproduction.
4.EstablishanECOprocess
Fixedwindowssetinventorylevelsinplaceinordertoscaleorreduceproductionvolumes.Inaddition,thisisbolsteredbyKanbans,sizedbasedontheleadtimeofthecomponentsandarangeoframp-readyrequirementsdeterminedbythecustomer.ThislimitsexposuretoshortleadtimeitemsandvalueaddedlaborbutmaximizesresponsivenessbyappropriatelysizingKanbansbasedonlongleadtimeitems.
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Key Benefits of Demand Flow Technology
n Reschedules and cancellations are eliminated.
n The customer only takes the product they need, when they need it.
n The rest of the supply chain will replenish the void created by the pull.
Demand Flow Line Designs
Demand Flow® technology lines designed by DemandPoint Inc. provide flexibility to adapt to change in forecast, demand, supply, etc.
S
S
S
10 20 30 40 xx
10 20 xx
10 20 xx
10 20 xx
10 20 30 40 xx
10 20 30 40 xx10
2030
xx
10 20
AssemblyLabor
TestTechnician
10 20
10 20
10 20 30 xx
10 20 30 xx
10 20 30 xx
S
S
Work OrderRelease Point
Sequence Point
ConsolidatedSub-Assembly Lines
High VolumeAssembly Lines Test Processes
Consolidation of LowVolume Assembly Lines
Test Processes
Test Processes
Final Assemblyand Pack
Final Assemblyand Pack
Final Assemblyand Pack
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Advantages of DFT across the organization include:
Part costs–BlanketordersallowyouandyourHLAsuppliertonegotiatethelowestpossiblecostwiththebestreleases
Shipping costs–replenishmentmechanismscanbeestablishedforlongterm,thusallowingthebestpossiblyshippingmethod
Technical or quality issues–Kanbansimproveresponsetimeandhelpmitigateissues
Inventory driven by long lead time items–Inventoryisstillhigheronlongleaditems,butreplenishmentmechanismsmitigaterisk
Materials organization overhead–whenworkinginaDFTenvironment,materialflowisdeterminedbyusage.Thematerialorganization’sworkisgreatlyreduced,loweringoverheadandallowingmoretimetobespentonengineeringandcostreductioninmanycases,(90%ofcostisdesignedin)
Vendor on-time delivery–Kanbansmitigatedelays,allowforscheduleadjustmentsandbringfocustothosevendorswhoneedimprovement
Faster response–Tochangesinenddemand
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Ideal Situations for Outsourcing
Nowthatwehavereviewedthekeyprinciplesandbenefitsofoutsourcing,let’stakealookatthetypesofmarketsandusersthatmostbenefitfromoutsourcingandwhy.
Start-Up Organizations
Intheseleantimesitiscriticalthatastart-upcompanymanagetheircashflowandkeepburnratesaslowaspossible.Start-upsfrequentlyinvestinmanufacturingresourceswhentheyshouldbefocusingassetsonresearchanddevelopment,design,andsalesandmarketing.
Astart-upshouldalmostalwaysleveragetheHLAfactorystrategyusingcontractmanufacturersaspartnersandtakeadvantageofthealreadylowfixedcoststhattheyhavedevelopedovertheyears.Contractmanufacturerscanprovidetechnicalexpertise,leveragetheirexistingmanufacturingstructuretokeepcostsdown,driveefficienciesbyapplyingadvancedmanufacturingtechniquesandmanagecoststhroughvendormanagedinventory.OnceyourcontractmanufacturerhassignedanNDA,thereshouldbenoneedtokeepfixedmanufacturingexpensesonthebooks.Everyentrepreneurshouldfocustheirattentionswheretheyareneededthemost-productdevelopment,businessdevelopment,salesanddrivingsuccessbasedontheircorecompetencies.
Cyclical End Markets
Companiesthatservecyclicalmarkets,suchassemiconductorequipmentandalternativeenergy,canuseoutsourcepartnersasanextensionoftheirmanufacturingcapability.Utilizationofoutsourcepartnersallowscompaniestocontrolfixedcostsinanupturnandpreservealowerbreakevenpointinadownturn.ThisisaccomplishedbyusingandHLAstrategy.
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Instrumentation & Capital Equipment Manufacturers
ForInstrumentationandCapitalEquipmentmanufacturerstobemostproductiveandprofitable,anoperationsstrategyfocusedonhigh-levelassembliescanhelpsimplifyproduction,minimizeinventory,floorspaceandoverhead.Thesetypesofproductslendthemselvestooutsourcingbecausetheyaregenerallyconstructedfromanumberoflarge,logicalsub-assemblies.Aforwardthinkingoperationsstrategyincorporatesmajorinitiativestodesignformanufacturingandlowestcost.
Thefollowingconsiderations,whenplannedahead,makeiteasierforthemanufacturingpartnertoprovidethebestpossibleserviceatthelowestlandedcost.
n Design sub-assemblies to be fully interchangeable and testable.
n Provide the widest options for components by specifying the technical parameters needed. Avoid source control when possible to allow for localizing of components.
n Pareto lead-times of all components. Lead-time is a big driver of inventory, the cost of change, and also dramatically reduces manufacturing flexibility. Keep long-lead time components to a minimum. This should be a design priority for your engineers.
Customer’sSystem
Frame
Chamber
Control Box
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Selecting a Partner that Can Provide a Competitive Advantage
Weallknowthestandardreasonsforoutsourcing;reducecosts,consolidatesupplybasesandutilizecapabilitiesthatmaynotcurrentlybeinhouse.Butwhatisitthatisnotbeingconsideredwhenselectinganoutsourcingpartnerorcontractmanufacturerthatprovidesthemostcompetitiveadvantage?
n Quality Systems
n Lean Manufacturing
n Supplier Consolidation and Global sourcing
n Advanced Manufacturing Practices
n Domestic vs. Overseas
n Engineering capabilities
Quality Systems
SeguehassurveyeditscustomersintenselyandfoundthemostimportantqualityrequirementtoourcustomersisISOcertification.
80%
70%
60%
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20%
10%
0%
% Respondants
ISO 9001
RoHS
CE, UL, CSA
ITAR
IPC 620
ISO 13485
SPC/CPKClean RoomISO
14000FD
A
Mil H
D KB 454
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Whenwebreakitdownbymarketsegment,defensecustomersrequireITARcertificationsandMilstandard454,automotiverequiresTS16949andourmedicalandlifesciencecustomersprioritizeISO-13485,tonameafew.
Atthispointintime,mostcompaniesstillinbusinessrealizetheimportanceofbeingISO9000certifiedandhaveagoodqualitysysteminplace.Therefore,thenextstepistoaskyourselfifthesystemisstructuredinawaytosupportyourneeds.Doesthecontractmanufacturermeasurethecorrectattributestosupportyourbusiness?
Medical Product Outsourcing OEM Survey
Inarecentsurveyofmedicalcustomers,weaskedtoratetheimportanceofvariousqualificationsinanoutsourcingpartnership.Withnosurprise,qualitysystemsrosetothetop.However,inaspecializedmarketsuchasmedicalproducts,havingspecializedskillsandcapabilitiesiscritical.Let’stakealookatwhattoconsiderwhenselectingapartnerandwhatyoucandotoensuresuccesswithyourcontractmanufacturer.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Quality System
sISO
Certi�cationSpecialized SkillsFlexibilityContinuous Cost Im
provement
Turnkey CapabilityRegulatory Know-H
ow
ReferencesSupply Chain M
anagement
Location
Company Size
Very Important Neutral Not Important
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Lean Manufacturing
Leanmanufacturingcontinuestobeaprioritythroughoutthesupplychain.Leanhelpstoincreaseefficiency,decreasewasteandimprovecustomervalue.Whenselectingacontractmanufacturerlookforonecommittedtoleanprinciplesandemployeesthataretrainedin5Sandthebasicprinciplesoflean.ThecompanyshouldemploythemostadvancedleantechniquesofJIT,demandflowmanufacturingandsuppliermanagedinventory
80%
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30%
20%
10%
0%
Implem
ent Lean Mfg.
Consolidate Supplier Base
Implem
ent JITSource from
Lo-Cost region
Source from U
S CMCM
is Lo-Cost RegionO
ther
Customers Focus on Lean
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SUSTAINContinues
Review
SORTClear Out
Essentials onlyOccasional items
kept elsewhere
SETCon�gureOrganize and
establish speci�cplaces for everything
STANDARDIZEConsistency
Establish uniformdocuments, workstations, etc. for
consistency
SWEEP/SHINEClean
Maintain a clean workenvironment and make sure
everything remains inits “set” place
5S
Workforce Organization
5SisthenameofaworkplaceorganizationmethodologythatusesalistoffiveJapanesewords--seiri,seiton,seiso,seiketsuandshitsuke.TranslatedintoEnglish,theyallstartwiththeletter“S”.The5Sapproach,oftendescribedasbeingthe“housekeepingwithinLean”,describeshowtoorganizeaworkspaceforefficiencyandeffectivenessbyidentifyingandstoringtheitemsused,maintainingtheareaanditems,andsustainingtheneworder.Itcreatesaclearunderstandingamongemployeesofhowworkshouldbedoneandinstillsownershipoftheprocessineachemployee.
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The 7-Step problem solving methodology is a roadmap for solving complex problems. The7-Stepapproachhelpsemployeesstandardizetheapproachtoproblemsolving,achievegreaterteamparticipationinproblem-solvingexercises,focusonthemostimportantproblem,anddevelopfaster,moreeffectivesolutionstoproblems.
The7-Stepprocessgivesacommonlanguageandapproachthroughoutanorganization.Ithelpsassuremaximumlearningfromourprocessesandlong-termsolutioncontainment.
The 7-Step
Quality
Process
STEP ACTION
1. Problem
2. Data
3. Cause
4. Solution
5. Results
6. Deployment
7. Debrief
Seven Step Quality Manufacturing Process
Define the problemand the goal
Analyze data; contain the problem
Determine verifiable root causes
Identify, plan, and pilot a solution
Validate effectiveness of the solution
Make the solution permanent
Learn from the problem & 7S process
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7-Step Quality Process Eliminates Field Failures for Global Biotechnology Company
Inthebiotechnologyfield,thequalityofacompany’sproductsisparamounttoitssuccess.However,whenthecompanychosetooutsourcethemanufacturingofacriticalsub-assemblycomponentofoneofitssystems,itunderestimatedhowvitaltheengineeringandproblemsolvingskillsofacontractmanufactureraretothesuccessofaprogram.Itwasn’tuntilthesystemwasutilizedinthefield,thatthecompanystartedlearningaboutasignificantproblemandhighfailurerates.Upwardsof50%ofthesystemswereleakinginthefield.Thecontractmanufacturerwasaskedtosolvetheproblem.
Contract Manufacturer Eliminates Failures and Jumps to Preferred Vendor Status
Immediately,thecontractmanufacturer’sengineerschosetoutilizethe7-stepproblemsolvingmethodologyasaroadmapforsolvingthecomplexproblem.The7-Stepapproachhelpsemployeesstandardizetheapproach,achievegreaterteamparticipationinproblem-solvingexercises,anddevelopfaster,moreeffectivesolutionstotheproblem.Thefirststepwastoproperlydefinetheproblemandassignanengineeringowner.Next,acontainmentplanwasdeveloped.Amassspectrometerheliumleakdetectorwasutilizedanditwasdeterminedthattheleakwascomingfromapurchasedsolenoidvalve.
Thevalvemanufacturerwasnotifiedoftheproblem,theproblemidentifiedandcorrectedandlastly,aspartofthe7-stepprocesscorrectiveaction,processdocumentationwasmodifiedtoinclude100%leakcheckingofthevalvepriortoassemblyinthemanifold.
Sincecompletingtheanalysis,fieldfailureshavedroppedtozero.Becauseofthequalityprocessesinplace,ISO13485registrationandtheabilitytodemonstrateengineeringexpertise,thecontractmanufacturerleapedimmediatelytoapreferredvendorstatusandcontinuestodemonstrateitscommitmenttothiscustomerandothersinthemedicalandlifesciencesmarkets.
Case Study: In-house engineering expertise and problem solving skills minimize risk and create success in an HLA environment
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Global Sourcing and Supply Base Consolidation
A reduction in parts managed yields a reduction in complexity.
Outsourcing,whetheritbeaturnkeysolutionorasub-assembly,reducescomplexityforitscustomer.Inadditiontothereductionincomplexity,costscanalsobereduced,ifyourpartnerhastheabilitytoprocurematerialfromlowcostregions.For the contract manufacturer, material is the secret sauce. If they have or can get the parts, then they are heroes to the customer. Ifthepartsarenotavailable,thentheyareafailure.Thisisoneareawhereearlyinvolvementcanhelptremendously.Weseemanysituationswhereengineeringhasdesignedaproductwithcomponentsthathavelongleadtimesandaresourcecontrolledwhentheydon’tnecessarilyrequirethattreatment.Atthispoint,itisverydifficulttohavethecustomer’sengineeringapproveandgenerateanECO.Definingrequirementswithspeccontrolisahugeimprovementandnotonlyallowsthecontractmanufacturertofindsecondsources,butmakesiteasiertolocalizecomponentsiftheproductismovedtoalowcostregionduringramp.
Business Continuity
Donotunderestimatetheimportanceofselectingacontractmanufacturerthathasastrongbusinesscontinuityplaninplace.Theplanshouldensurebestpracticesfor:
n Rapid recovery of IT infrastructure and communications
n Redundant offsite back-up of all critical documentation
n Vendor / Supplier agreements to support disaster recovery
n Duplicity of critical tooling and equipment off site
n Dual sourcing on long lead time critical components
Ideally, your
partner will have a
complete business
continuity plan
in place to
ensure continuous
operations under
adverse conditions.
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Specialized Skills and Capabilities
Ifqualityisagivenandtheappropriateprocessesareinplace,thenwelooktoasupplier’stechnicalcapabilitiestomatchproductrequirements.Asyoureviewpotentialsuppliersorpartners,youmustevaluatethecapabilitiestheybringtothetableandensuretheyalignwithyourproductandoperatingstrategy.
Forexample,Segueprovidesalltypesofelectro-mechanicalassemblythattakeadvantageofverticalintegrationfromitsmachineshop,PCBproductionlines,cableandharnessshopandtheapplicationofadvancedmanufacturingpractices.Inaddition,SegueManufacturingprovidesengineeringservicestoaugmentacustomer’sproductdevelopment,itspecializesinlowtomoderatevolumemanufacturing,andisverycompetitivewithproductsthatrequireend-of-lineconfiguration.SegueprovidesglobalsourcingcapabilitiesandmanufacturingfromitslocationinChina.Thesespecializedcapabilitiesmustbeconsideredwhenselectingacontractmanufacturer.
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Most Important
Important
LeastImportant Biz. Cont. Plan
Strong Bal. SheetD
iversi�ed CB>$10M
RevenueSBA Certi�cation>$25M
Revenue>$100M
Revenue
Does Scale Matter?
Ina2009surveySegueaskedcurrentandpotentialcustomersifthesizeofthecompanywasanimportantattributeinselectingacontractmanufacturer.Theresultswereverysurprisingandreflectiveofthe2008/09downturn.Welearnedthatcustomersdon’tregardthesizeofthecompanyasimportantasabusinesscontinuityplan,adiversifiedportfolioofservedmarketsandastrongbalancesheet.
Criteria for Selecting a Contract Manufacturer
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Telecommunications5%Other
6%Homeland Security11%
Aerospace12%
Aerospace12%
IndustrialEquipment
13%
Military16%
Medical24%
Wecan’tstressenoughtheimportanceofadiversifiedportfolioandthepracticeofadvancedmanufacturingtechniquesinthecontractmanufacturingbusiness.Adiversifiedmarketportfolio,theuseofDemandFlowTechnologyandvendormanagedmaterialwillhelpgeneratepositivecashflowthroughadownturnandhelpensureastrongbalancesheet.
Don’t Under Estimate the Importance of a Diversified Portfolio
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Choosing Carefully Between Domestic and Overseas
Tenyearsago,themajorityoftheOEMcustomer’sbasewaslocatedintheUnitedStates.Contractmanufacturersweretypicallychosenwithin50milesoftheendusertoobtainlocalserviceandsupport.Timeshavechangedandglobalmanufacturingsectorscontinuetogrowanddevelophugeconsumerbasesoftheirown.Manufacturinginthesemarketsisnolongerfocusedjustonexportsbutonsupportingtheirownconsumerbase.Whathasn’tchangedisthatOEMsarestillchoosingcontractmanufacturerslocaltotheirmanufacturingtotakeadvantageoflocalserviceandsupport,coststructuresandlocalizationofcomponents.Fundamentallytherearetworeasonstochooseacontractmanufacturerlocatedoverseas;costandproximitytoendmarkets.Let’stakeadeeperdive.
Cost TheaverageloadedshoprateinChinais$1.50/hour.Thiscanlookveryenticingatfirstglance.However,movingyourproductiontoChinadoesn’talwaysmakesenseforyouroverallbusiness.Itisimportanttoconsiderwhenthetransitionworksmosttoyourbenefit.Typically,inlaborintensivemanufacturingsuchashighvolumecableandharness,sheetmetal,complexweldedassemblies,anddiecasting–assembliesthatrequirelotsofset-upandmanualmanipulation–thislowshoprateisworthasecondlook.Remembertotakeintoconsiderationthecostsavingsacrosstheentirevaluechain–localizecomponentstoreducestackedmargins.
Everycomponentofanassemblyhassomeamountoflaborinit.Whenyouconsiderallofthislaborasthelaborinasub-assembly,thisisstackedlabor.Ifbuildinginalowcostregion,unlessallcomponentsaresourcedfromthere,youarenottakingfulladvantageofthebenefitsofthatregion.Itisnecessarytomaximizecontentfromlocalsourcesinordertoextractthelowestcost.Labor,transportationcosts,andoverheadmustallbeaccountedforwhenplayingthegametoreduceoverallcosts.
Remember to
consider the cost
savings across the
entire value chain
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Example: AmedicalOEMisassemblingin-houseacomplicatedelectronicboxbuildassemblythathas5%laborcontent.Manymaylookatthisandthinkthatitmaynotbeworthmovingoverseas.However,mostlikely,thisdoesnotrepresentallthelabor.Whencalculatingthecostbenefitsofoutsourcingtoalowcostregion,takeintoconsiderationremovinglaborthroughouttheentirebillofmaterialsratherthanjustonthefinalassembly.Localizationofcomponentscanreduceyourcostsbymuchmorethanthesimplereductionoflaboronthefinalassembly.
Ifmovingoverseasisnotpartofyouroperatingstrategyortoomuchofastretchforyourorganization,lookforalocalcontractmanufacturerthatleveragestheselowerpricesintotheproductsthattheybuildandassembleintheUnitedStates.Haveyourcontractmanufacturerleverageitshigh-levelassemblyoperationwithoverseascontenttobecompetitiverighthereahome.
Proximity to End Markets
MoreandmorecapitalequipmentmanufacturersarelocatedincountrieslikeChinaandIndiabecausethatiswheretheproductisbeingsold,localsupportisrequiredandthegrowthopportunityinthemarketisanticipatedtobetremendousfordecadestocome.Inthosecases,themovemakessensetomaketheinvestmentforthelongterm.ConsiderchoosingacontractmanufacturerwithlocationsinboththeU.S.andoverseastoprovideyouthebenefitsofglobalmanufacturing,proximitytoyourenduserandthelocalserviceandsupportyoudemand.
Remember,itisextremelyimportanttochoosecarefullybetweenlocalvs.overseasmanufacturing.Alwaysconsidercost,logistics,cashflowandendmarketsserved.ManyU.S.companiesthathavemovedprimarilytoreducecostshavefoundthattheadditionalcomplexityandlogisticscostshaveeatenawaymostofthecostsavings.
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Case Study: Complex Control Cabinet Smoothly Transitions Overseas to Create Optimal Success
Aleadingalternativeenergycompanygrewsiliconcrystalsintosolarcellsusingcomplexcontrolcabinetsmanufacturedfromend-to-endbyalocal,U.S.basedcontractmanufacturer.With95%oftheOEMsaleslocatedoverseas,theeffectthishadonshippingcostsandleadtimeswasundeniable.Itwasapparentthatmovingtheproductionoffshoretothecontractmanufacturers’Chinafacilitywouldbenefitthecustomerinmorewaysthanone.
ThecontractmanufacturerwastaskedwithcloselymonitoringthetransitionofthemanufacturingtoChina.Aprojectmanagerwasassignedtooverseetheoperations,billsofmaterialswerereviewed,theprocesswascertifiedandproductionwasramped.Inaddition,inanefforttodivertrisk,thecontractmanufacturermaintainedproductionofcustomizedcabinetsintheU.S.Havingbothglobalandlocalpresenceallowedformanufacturingtobeallocatedbetweenmanufacturingfacilitiesinordertomeetspecificcustomerneeds.
Benefits
n Labor and localized materials resulted
in a 20% cost reduction
n Proximity to the end user significantly
reduced shipping costs and lead times
n 100% first pass yield
Processes
n Cable and harness assembly
n In-house machining
n Kanban
n JIT
n Lean manufacturing
n DFT
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Creating the Win-Win
Inthissection,wewilldiscussagoodstrategicalignmenttocreatethewin/winandachievebetterserviceandresponse.Tostart,acustomerconsidersoutsourcingforanumberofreasons:
1.Obtain skills and expertise not available in-house
2.Improve proximity to end markets
3.Lower costs
4.Create additional capacity
5.Create more (or all) variable costs in manufacturing operations and marketing support
Basedonwhatyouwanttoachievewiththerelationship,acontractmanufacturerisselectedtoalignwiththisinitiative.Alignmentcancomefrommanythings:geographicalpresence,skillsandcapabilitiesand/orengineeringexpertise.Onlyyoucanmakethedecisionthatisrightforyourbusiness.Partnerships,onceestablished,shouldbeconsideredlong-termandstrategicforbothpartiesandthereforestrongalignmentbecomesacriticalsuccessfactor.
Next,itisimportanttorecognizeandacceptthatcontractmanufacturersareinbusinesstomakemoney–thisiswhytheyexist!Withthatbeingsaid,whatistheapproach?Itisimportanttoevaluateacontractmanufacturer’sskillsandcapabilities,reviewqualitysystemsthatareimportantforyourbusiness,andunderstandtheirareasofexpertise.Forexample,somecontractmanufacturersarebetterathighvolume,lowmix,whileothersarebetterwithlowtomoderatevolumes,highmix.
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Vertical Integration
VerticalIntegrationwithinacontractmanufacturercanplayakeyroleinthesuccessofapartnership.Theabilitytomanagethemanufacturingofaproductfromstarttofinish–includingmachiningparts,printedcircuitboards,cableassemblyandengineeringsupportandtest–toprovideafinishedproductorsub-assembly,canresultinthecostsavingsyouaretryingtoachieve.
Early Involvement
Anyrelationshipwithacontractmanufacturer,nomattertheworktheyareproviding,canbeenhancedwithearlyinvolvement.Knowingthat,ingeneral,90%ofaproduct’scostisdesignedin,earlyinvolvementallowsforacontractmanufacturertoassistyouindesigningformanufacturingtokeepcostslow.Asanexample,manycustomersapproachtobuildorquotepartsandcomponentsthatarefullyspecifiedandsourcecontrolled–oftenfromU.S.manufacturers.AcustomerseesitasanopportunitytosavemoneybylocalizingitinChina.However,itisverydifficultforthecontractmanufacturertolocalizethecomponentsastheU.S.componentsarealreadyspecified.Withearlyinvolvement,thecontactmanufacturercanrecommendcomponentsthatcanbelocalizedinChina,resultinginsignificantreductionofstackedlaborcosts.
Lastly,earlyinvolvementallowsforconcurrentengineering,whichreducestimetomarket.Thecustomerisstilldesigningwhilethecontractmanufacturerisdevelopingtooling,processprocedures,aligningvendors,andvendornegotiations.
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How to Define Terms and Conditions to Create the Win-Win
Defininggoalsupfrontwithyourcontractmanufacturercanhelpproperlyestablishyourtermsandconditionstoestablishawin-winpartnershipbetweenthetwoparties.Ingeneral,thisiswhatyouarelookingfor:
Inaddition,thecontractmanufacturerfindsitbeneficialtohaveanannualcontractwiththecustomertoallowforbettercontrolofthemanufacturingprocess,shipmentsandtheproductionrange.Italsoprovidescontractmanufacturerstheabilitytonegotiatewiththeirvendors,takingadvantageofeconomicalorderquantity.Theannualcontractdoesn’tnecessarilymeanthecustomertakesonmoreliabilitybutitprovidesthecontractmanufacturerwithabetterplanningwindow.
n Lowest total cost
n Reduced Inventory
n Minimized risk of obsolete inventory
n Limited purchase order commitments
n No overproduction
n Reduced wait times and logistics costs
n Streamlined work flow
n Improved responsiveness to changes in demand
n Minimized impact of engineering design changes to manufacturing costs
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The customer can control his liability by doing the following:
Shipments based on Customer release
n No reschedules required
n Line resizing when appropriate / based on forecast
n Cancellation based on 30, 60, & 90 day windows
Customer determines production range
n For example; 100 to 150 per month
n Additional provisions for Ramp Planning
n Provides rolling six month forecast
Guidelines for defining fixed windows for reschedules and cancellations:
First 30 day window:Allmaterialandlaborapplieduptothestopdateis100%theresponsibilityofthecustomer.
Second 30 day window:Nolabor,andonlymaterialonhandwithleadtimesgreaterthan4weeks.
Third 30 day window:Nolaborandonlymaterialwithleadtimesgreaterthan8weeks.Plusmaterialthatisinplaceduetomutualagreementforthepurposeofmeetingreleaserangesandrampreadinessplan.
Engineering Change Orders: CustomerisresponsibleforexcessandobsoletematerialduetoECO’sinsidenegotiatedwindowsforreschedulesandcancellations.
Key Benefits:
Annual visibilitytohelplowerliability,negotiatebestpricingandenterintoKanbanagreements,
Consumptionofmaterialbasedoncustomerdemandtosimplifyproductionplanningandsupportandeliminateinterruptionsinmaterialflow.
Themostefficient utilizationofspace.
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Putting It All Together – Integrating with the Product Life Cycle
DuringthecourseofthiseBookwehavelearnedthatoutsourcingismuchmorethanchoosingthebestprice.Sohowcancompaniessystematicallyintegrateallthebenefitsofatrueoutsourcingpartnership?Byleveragingacriticalsetofprocessesthatalreadyexistwithinyourcompany:TheProductLifecycle.Theobjectiveofthisprocessistohelpcompaniesmaketherightproductrelateddecisionsattheappropriatetimewithinastructuredframeworkofactivitiesandgates.IntegratingHLAorturnkeyoutsourcingwithacompany’sProductLifecycleencouragesallstakeholderstoleverageoutsourcingbestpracticesateachphaseoftheProductLifecycle.
HLA and the Product Management Lifecycle
MostcompanieshaveaformalapproachtoProductManagementandhaveaprocesssomewhatsimilartothatbelow:
Connectingyourcompanies’productlifecyclewithaHLAoutsourcingstrategycanprovideyouwiththelowestlandedcost.Typically,theearlierintheproductlifecycleyouengageacontractmanufacturer,thegreatertheyield,notonlyinlowercostsbutindecreasedtimetomarketbyleveragingtheresources,expertiseandvendorrelationshipsofthecontractmanufacturer.Oftentimesthisalsoreducestheneedtore-iteratedesignsaspotentialmanufacturingconcernsarecaughtearlyon.
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Concept/MRD Phase – Getting the Document Requirements Right
ManyofthecriticalcostandtimetomarketfactorsareidentifiedintheConcept/MRD(marketrequirementsdocument)phaseofaproject.Partneringwithacontractmanufacturerandsharingthisinformationearlyoncanbethemostcost-effectivewaytostartyourpartnership.Muchofthesuccessatthisstagecomesfrombeingabletoprovidecorrectdocumentationtothecontractmanufacturerandpossiblevendors.
Detailed businessplan w. cost targetsmfg. strategy andservice strategy
Complete MRD &develope high levelproduct concept
Create mfg. strategy.identify potentialcritical componentsand devlop vendor relationships
Create first bill of materials.Support Engineering in the procurement and fabricationof proto-type material
Support Engineering changes. Create “alpha” level of documentation
Create “beta level” documentationfor complete products. Build beta unitsusing system to drive material. Beginprocess specification. Create serviceparts, RMA, and spares strategy
Complete flow diagram,block diagram and all“A” release materials.Begin shipping @ “Beta”level to customer beta sites.
Collect feedback fromcustomer beta sites.Review productionmethods and materials.Hold final design review.Make final changes and launch “A” release.
HLA Touch Point
Update business plan& MRD set engineeringspecification
Prove engineering specs,MRD and business plan,check cost targets, mfg.strategy, & service strategy
Beta shipments andacceptance, begincycles of learning
Prove engineering specs,MRD and business plan,check cost targets, mfg.strategy & service strategy
Product finalization and deployment
Concept/MRDConcept/MRDConcept/MRD Initiation Design Alpha Beta Release
Product Management Phases
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The importance of concise documentationforoutsourcedcomponentscannotbeover-emphasized.Eventhebestcontractmanufacturercanonlyprovideyouwithqualityandrepeatableproducttotheextentthatyouhaveprovidedthenecessarydocumentation.Forthisreasonaloneitisbesttoengagewithyourcontractmanufacturerearlyinyourproductlifecycle.Theyareintimatelyfamiliarwiththenecessarydocumentationstandardsandcanassistyouinensuringthattheproductyou’reintendingtooutsourceisactuallywhatwillbeproduced.Forexample,whenworkingwithacontractmanufacturer,therearetremendousbenefitstoberealizedbyproducinganaccuratebillofmaterialsandfollowingthetipsbelowtoobtainatimelyandaccuratequote.
Seven tips to ensure BOM Accuracy
1.MakesureyourBOMisaccurate!
2.SendyourBOMsasanExcelfileinsteadofaPDF.
3.Forcommodityitems,listthemanufacturer’spartnumbernotthedistributorpartnumber–oftentimesthecontractmanufacturercangetitcheaperandfaster(e.g.,TYCO205204-4vs.distributorpartnumberA1038-ND).
4.Forcomponents,providemanufacturer’snameandpartnumber.
5.Providethemil-specforwire,notthewiremanufacturer’spartnumber(e.g.,UL1569vs.Alpha3051)
6.Ifpossible,providealternatepartnumbers,itmayhelpwithdeliverytimes(e.g.,MIL-W16868/1-BFB-3orUL14022AWGRedvs.Alpha7131)
7.Andofcourse,legible,accurateandcompletedrawingpackagesalwayshelptospeedquotetime!
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Initiation Phase – Analyzing the Benefits Correctly
AtthispointinthePMPprocessthereisoftenanobjectivetodeterminethetotalcostoftheproduct.It’sagoodideatocarefullyevaluatetherealcostsofinsourcingvs.outsourcingsub-assembliesaspartofanHLAstrategy.
What do I measure?
$5.0M
$4.5M
$4.0M
$3.5M
$2.0M
$2.5M
$2.0M
$1.5M
$1.0M
$500K
$0
$500,000$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000$4,000,000$4,500,000$5,000,000
Salaries
T&E Expense
Material
Facilities Costs
Consulting
Depreciation/Amortization
Other
Breakeven
$2,552,798
Understandingabusiness’breakevenpointandthecostofrunningthebusinessiskeytodetermininganappropriateoutsourcingstrategy.Thisincludesthebenefitsofleveragingoutsourcedmanufacturingtocontrolfixedcostsandprofitability.
Quarterly Breakeven EBITDA
• Totallandedcost
• Numberofdirectpartsmanaged
• Numberofvendorsmanaged
• Timetomarket
• Cashflow
• Inventoryreduction
• Manufacturingoverheadasapercentofshipments
• Fixedcosts–hasmybreakevengonedown?
Byincreasingtheuseofoutsourcedmanufacturing,materialcostsmayincreasebutfixedcostswilldecreaseatahigherrate.Leveragingacontractmanufacturerwillshiftmaterialcostsandoverheadtovariable,allowingformuchbettercontroloffixedcosts.
Knowingthebreakevenpointandleveragingcontractmanufacturingprovidestheabilitytoquicklygetbacktothepointofprofitabilitywhenthemarketshiftsandimmediateresponseisrequired.
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Design Phase – Quality and OTD
Di�erentiators
Must-haves
23456789
10
Quality
ver y
ost
ad T ime
on
C ustomer Ser vice
C on�dentiality
US E ng. Suppor
CCustomization
Quality
On-time Delivery
Cost
Lead Time
Communication
Customer Service
US Manufacturing
Con�dentiality
US Engineering
Support
1 = Most Important10 = Least Important
Purchasing Decision Criteria: U.S.
Formostcompaniescost,qualityandon-timedeliveryarethetopthreecriteriainselectinganoutsourcepartner.Inmanywaysthesecanessentiallybeviewedasthe3cornersofanequilateraltriangle.Beingoverlyfocusedononeisusuallytothedetrimentoftheothertwo.Itisduringthedesignphasethatthefinaltrade-offs/compromisesbetweenquality,costandon-timedeliveryneedtobeestablished.Onceaproductreachesalphaorbeta,itbecomessignificantlymoredifficultandexpensivetoaltertherelationshipthatwasestablishedinthedesignphase.
Whenapotentialsupplierindicatestheyare“alwaysthelowestcost”,itmaymeanthatdeliverytimessufferfromextensivevariabilityortheneedtoreworkproductmoreoftenthandesirable.Similarly,astrongfocusonqualityneedstobebalancedwithcostandon-timedelivery.Generally,however,formostcustomersqualitycontinuestobeconsideredthe#1reasontopurchase,orisit?
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Customers from both the U.S. and China were surveyed separately to see what criteria was most important to them when selecting a contract manufacturer. Bothsetsofcustomersindicatedqualityasthenumberonereasonforpurchasingfromaparticularvendor.However,forChina-basedcustomers,the2ndmostimportantcriterionwascostwhileforU.S.-basedcustomers,itwason-timedelivery.Thisisindicativeofwhycustomerschooseoverseasmanufacturing.
Butisittruethatthenumberonereasonforselectinganoutsourcingpartnerisquality?Reallifeexamplescontinuetocontradicttheseresultsassuppliersaremoreoftenthannotchosenbasedoffoflowestprice.Thisoftenworksagainstthecustomerwhenproblemsoccurthatcreateproductiondelaysorrepairproblemsinthefieldthatfarexceedthecostsachievedfromselectingawell-qualified,quality-orientedsupplier.Aspartoftheparadox,althoughcostsoftendrivetheselectionofthecontractmanufacturer,thecustomerdoesn’talwaysengagewiththecontractmanufacturerearlyenoughinthePMPtorealizecostsavings.Componentsarespecifiedthatcan’tbelocalizedandlonglead-timecomponentscandriveupinventorycostsandreduceflexibility.
Purchasing Decision Criteria: China
012345678910
US Manufacturing1 = Most Important10 = Least Important
Quality
Cost
On-time Delivery
Lead Time
Communication
Customer Service
US Engineering Support
Customization
Con�dentiality
Di�erentiators
Must-haves
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Ensuring a Predictable Process for Success
Wehavenowcomefullcircleinourdiscussion.EarlyoninthiseBookwestatedthatformanycompanies“outsourcing”waspayinglessforthepartsthatmakeupaproductorsub-assemblyduringtheproductionrampphase.Wehopewehavebeenabletoshowthatasuccessfuloutsourcingstrategyincludeslowcostbutissomuchmore,frommanaginginventorytoreducingtimetomarkettoleveraginglowcostmanufacturingregionsmosteffectively.Ifyouhavedoneyourhomeworkandchosenyouroutsourcingpartnerwell,rampingyourproductsfromalpha/betathroughvolumeproductionwillbeapredictableprocesswithfewsurprises.Marginswillimproveandprofitswillgoup.Bothyouandyouroutsourcepartnerwillbenefitfromawin-winrelationshipandcanlookforwardtofutureworktogether.
For more information on outsourcing and to continue
the discussion, please contact Segue Manufacturing
Services at [email protected] or visit our blog at
www.segue-mfg.com/blog
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About the author:
Peter J. Frasso
Peterwaspast President/CEO with Segue. Prevously he was the
ExecutiveVicePresidentandChiefOperatingOfficeratFEI, and Senior
VicePresidentofGlobalOperationsatBrooksAutomation.Inaddition,heheldexecutivelevelpositionsatLightpointCommunicationsandVarian,Inc.AtVarian,PeterledthedivisiontobetwicenamedasoneofIndustryWeek’sBestPlantsinAmerica,WinneroftheMassachusettsQualityAward.Currently,PeterservesasaDirectorforLytron,Inc.andamemberoftheTechnicalAdvisoryBoardforMetrosol,Inc.